Contrary to expectations, the market-friendly incumbent president, Mauricio Macri, received just 32.1% of the vote compared with Fernandez’s 47.7%.

How did markets respond to the primary election results?

The 46% fall in Argentina’s S&P Merval Index on Monday was the second largest one-day crash in any stock market in the world in the last 70 years (based on 94 Bloomberg tracked exchanges). The MSCI Argentina Index fell 40%.

S&P Merval Argentina 12 month price performance

Source: Schroders. Refinitiv data correct as at 13 August 2019. S&P Merval quoted in pesos. Past performance is no guarantee of future returns.

The country was only added to the MSCI Emerging Markets index in May this year, albeit it forms a very small part. The emerging markets index fell just 0.7% on Monday, while the MSCI World was down 0.8%. (All of these equity market returns are in US dollar terms).

The Argentinian peso lost as much as 30% of its value versus the US dollar at one point. Argentina is particularly vulnerable to exchange rate fluctuations, as 80% of the country’s debt is in foreign currency.

Markets are now pricing in a 78% chance of Argentina defaulting on its debt obligations.

The equity fund manager view

Pablo Riveroll, Head of Latin American Equities:

“We had been seeing several green shoots in the Argentine economy, including declining inflation from very high levels, a growing trade surplus, some currency stability and a few domestic growth indicators turning positive. It is clear from Sunday’s results that these have not been felt by the population, and the vote was a reaction to recent economic hardship.

“Argentina had been on a path to economic normalisation by pursuing restrictive monetary and fiscal policies, together with a very large IMF programme. The IMF agreed to fund the country’s external financing needs in exchange for macroeconomic orthodoxy. The economy needs another 12-18 months of policy continuity to see the benefits of such measures.

“However, if Alberto Fernandez is elected, as we now expect, a continuation of policy orthodoxy is a significant risk. While Fernandez’s economic plan is not clear yet, his popularity is mostly driven by his running mate, former President Cristina Fernandez de Kirchner. Kirchner has been very critical of the deal with the IMF, the removal of capital controls and the energy tariff increases, in addition to having several corruption allegations against her. Alberto Fernandez himself also made radical comments during the campaign, including reinstating capital controls and reigniting growth by easing fiscal and monetary policy. Whether he moderates these views in the coming months is an open question.

“Yesterday’s currency, market drop and bond market reaction is likely to impact confidence and bring back inflation, making economic momentum by October worse than it is today, and hence making it likely for Fernandez to retain a wide lead. Given the large stock of US dollar-denominated debt and significant financing needs in 2020 and 2021, the currency depreciation will increase the ratio of debt to GDP, putting further pressure on the fiscal accounts. Solvency and liquidity risk are therefore likely to increase significantly if Fernandez wins the October election.

“It will take a long time to understand what Fernandez’s true policies are going to be, so for the next 12 months we would expect much higher uncertainty, a deterioration in growth due to a lack of confidence and a reversal of the recent decline in inflation. Given the increased uncertainty, we expect investors will factor in a higher risk premium and significant downward revisions to earnings. The outlook for Argentina, both short and medium term, has deteriorated sharply following Sunday’s primary and hence the equity market is unappealing as an investment destination.”

The bond fund manager view

James Barrineau. Head of Emerging Markets Debt Relative:

“The outcome of the primary election was completely unexpected; every pre-election poll had the candidates from 2 to 5% apart. Also, shaky economic fundamentals had been improving for a number of months, with currency stability bringing improvements in lower inflation, higher real wages and a bottoming of growth. All of this suggested to market participants that the momentum should have been with the market-friendly President Macri.

“The market has reacted by pricing into bonds, at least temporarily, a very high probability of default and a zero chance of a Macri win in general elections in October. The currency has weakened substantially.

“Debt investors will be looking for two signposts in the short term:

“Firstly, a response from Fernandez. While he was mostly quiet in the run-up to the primary he did say some imprudent things on economic policy. However, as the clear front-runner now and presumed victor, he has an incentive to try to calm markets so he does not take over a renewed atmosphere of crisis from day one.

“Secondly, a demonstration of the central bank’s ability to limit currency volatility. A substantial depreciation of 20% or more after today could spark another round of higher inflation and a spiral of further depreciation, and render debt metrics unsustainable for the medium term.

“The central bank had considerable success earlier this year when it adopted a flexible intervention approach and we assume that will continue. Lower currency volatility will surely be taken as a positive by dollar bonds if it can be achieved.”